State audit: Colorado Department of Transportation's $4.1 billion in spending lacked sound policies

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Apr. 4—Since 2012, the Colorado Department of Transportation spent $4.1 billion on construction projects that bypassed strict low-bid practices, but while doing so the state agency lacked sound policies guiding such spending, which resulted in statutory violations and payments above fair market value, a Colorado state auditor report concluded.

The performance audit, requested by Republican legislators in the wake of an 2021 investigative report by The Gazette, recommended an overhaul of CDOT's procurement practices for what are called "alternative delivery projects."

The Transportation Department agreed to put in place all 20 recommendations made in the audit conducted by the office of State Auditor Kerri Hunter.

The Gazette's investigation found that local contractors said they had been bypassed as the state's transportation officials sent most alternative delivery projects to two out-of-state construction firms, Omaha-based Kiewit and Wisconsin-based Kraemer of North America, which is owned by Tokyo-based Obayashi.

The Gazette also found that the state's transportation consulting industry benefited from lenient laws that allow consulting firms to recruit and hire transportation engineers away from the state.

The audit reviewed 19 active alternative delivery projects CDOT managed during the fiscal years 2021 and 2022, with a total original contract price of $3.5 billion, ranging from a low of $8.23 million to a high of $1.27 billion.

The audit determined that in eight of those projects, the state Transportation Department "did not fully use its project delivery process" for deciding when to forgo strict low-bid procedures, "increasing the risk of choosing an unsuitable delivery method that could lead to cost and schedule overruns."

The growth in alternative delivery followed passage by the state legislature of House Bill 13-1292 a decade ago, which loosened rules that had required the state agency to award construction work to contractors offering to do the job at the lowest cost. Under that law change, the state agency soliciting the work can consider factors other than cost, such as a contractor's reliability or employment practices, when awarding bids.

That new law prompted growth in "alternative delivery," authorizing the use of a "design-build process" and a "construction manager/general contractor" program that allows state officials to short list competitors for a project, which can drastically reduce the pool of contractors seeking to win work.

In one instance, according to the audit, a contractor that submitted an "incomplete proposal" under the "alternative delivery process" remained one of three firms in the running for a $325.8 million contract when the contractor should have been barred from consideration. Keeping that firm eligible excluded a contractor that submitted a proposal that should have been a candidate for the contract, the audit found.

The contractor with an incomplete proposal "had been awarded" multiple alternative delivery projects in the past while the firm bumped from consideration had only been awarded one alternative delivery project in the past, according to the audit.

The audit found that state officials also ignored independent cost estimates they gathered when negotiating for such alternative delivery work. CDOT awarded contracts that were nearly $18 million more costly than independent cost estimates had suggested for 27 contracts on nine projects, the audit found.

In addition, the audit determined the Transportation Department kept paying contractors even after their contracts had expired, in violation of state statute. The audit found the state agency paid $700,000 to continue work after preconstruction contracts had expired and an additional $158 million for construction work related to expired contracts.

Funneling work to construction firms and design firms after their contracts expired put the state agency in legal peril because once a contract terminates "the state is no longer subject to the rights and responsibilities established in the contracts," the audit states. It further found that the practice of paying for additional work once a contract terminates "risks inappropriately limiting competition."

Although CDOT claims "alternative delivery" methods result in time savings and cost savings, the audit found that wasn't always the case. The biggest cost overruns that had to be covered by contract amendments occurred in the "design-build" program that allowed the department to directly negotiate with contractors as opposed to strictly using low-bid procedures, the audit found.

One design-build project jumped by 25% over the original contract amount, escalating to a total $65 million cost. Another one jumped up to a total $77 million cost, a 13% increase from the original contract, according to the audit. Generally, projects that adhered to the strict low-bid procedures had the lowest amount of cost overruns, the audit found.

In addition, the audit determined that significant delays had occurred in alternative delivery projects, with construction delays of nearly a year or more for such projects as reconstruction of the Interstate 25 south gap.